Scrap Metals Supplement - A Loaded Issue

The seemingly sudden change regarding the new rules for loading scrap metal in open-top gondola cars has taken many processors by surprise. Many may still be asking, "Who issued this directive? Why was this change ordered? Why didn’t we get any warning? How does this impact my business?" Hopefully this article will provide some of the answers scrap processors are seeking.

SELF-REGULATION

The Association of American Railroads (AAR), Washington, D.C., is an organization of the major North American railroads. Essentially the AAR is the railroad industry’s trade organization that has created rules for multiple aspects of railroads. This allows the industry to self-police its own membership and the subscribers to its rules within the guidelines of government regulation and requirements. The AAR publishes a code of rules for interchange of equipment among carriers, car service standards for interaction among carriers as well as among carriers and shippers. The organization also publishes certain accounting rules and equipment specifications, as well as being involved in numerous other aspects of railroading, such as safety and technology. Virtually every carrier in North America subscribes to these codes.

Aug. 8, 2008, the Open Top Loading Rules Committee within the Safety and Operations Division of the AAR issued an "Early Warning" to AAR subscribers. A new restriction on loading scrap metal into open-top railcars would become effective Aug. 20, restricting scrap metal from being loaded above the side rails and ends of any railcar of this type. This warning was then passed on to railroad customers, along with diagrams depicting how to properly load such railcars.

SAFE PASSAGE

The basis for this change was described as a safety issue. The No. 1 priority on railroads is safety. The AAR has reported that scrap had fallen off cars while in transit, striking various objects and, most seriously, striking and injuring employees. Attempts by carriers for years to enforce existing rules defining proper loading of scrap had proven insufficient. According to the AAR, shippers continued to load in violation of those rules, endangering life and property.

Prior to this alert, loose scrap could be loaded in a slope as much as 18 inches above the sides and ends of the railcar as long as the scrap was below the ends and sides at each edge and would not fall off en route. Baled/bundled scrap could be loaded above the ends and sides, as long as no bale/bundle extended more than 50 percent above adjacent bales that were at or below the sides and ends.

The change went into effect Aug. 20 and applies only to loose scrap. Bales and bundles can still be loaded according to the previous rule. Loose scrap, such as shredded, HMS, plate and structural, clips and busheling, can no longer be loaded above the sides and ends of an open-top railcar at any point in the load.

The various committees of the AAR meet regularly to review any potential changes to existing rules and to propose new ones as needed. The AAR’s guidelines do not include a requirement to permit debate and discussion of proposed rules. However, because this change has a potentially significant impact on rail shippers, the Institute of Scrap Recycling Industries Inc. (ISRI), also based in Washington, took immediate action on behalf of its membership and addressed its concerns directly to the AAR. Because of their efforts and considerable negative feedback from rail shippers, the AAR allowed comments to be submitted within the first 30 days of the effective date of the ruling.

ISRI submitted a letter to the AAR detailing its concerns and recommendations in response to this ruling. A key concern on ISRI’s part was that there was a failure of the AAR rule making process. All the correspondence delivered to shippers indicated this was a rule that had been universally accepted and was being implemented by all AAR subscribers Aug. 20. In reality, the AAR admits that the rule was proposed, not confirmed as official and effective on that date. As a result, some carriers have followed the rule to the letter starting Aug. 20, while others have granted much more flexibility to their shippers. The AAR said carriers had the right to implement the rule on that date, even though it was not a requirement. This inconsistency has the potential to disrupt joint-line shipments where one carrier approves a load while another rejects that same load.

Currently ISRI reports that while the AAR has acknowledged receipt of the letter and the various concerns expressed in the document, it is unlikely that it will reverse or revise the ruling, meaning the new loading rules will be accepted officially. In practice, shippers must load according to these rules now, since there is no guarantee any carrier will exempt them.

IMPACT ON BUSINESS

Estimates from within the industry and from carriers show the new loading rules could reduce total cubic foot capacity for loading loose scrap in the average gondola by as much as 10 percent. Some results of this include:

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Increased freight cost—If the per-car rate is $1,500, and shippers could previously load 85 gross tons of shred in the average gondola and now can only load 77 tons, then the rate per ton will increase from $17.65 to $19.48.

Tightening of the universal gondola pool—Carriers potentially need to supply anywhere from several hundred to several thousand more gondolas per month to move the same amount of product. When the gondola market tightens again, which will likely happen in 2009, this will add to the shortage.

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Increased railcar damage—To maximize tonnage per car under the new rule, shippers will more vigorously tamp loose scrap to increase its density. Carriers may charge back damage to shippers.

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More interest in private fleets—The demand for higher-cubic-foot gondolas has already been seen. Dense shred that could previously effectively use smaller gons such as 2,244 cubic feet now need the 2,494-cubic-foot standard size and may now look for the newest gon size of 2,743 cubic feet. This could create more interest in private fleets to guarantee the larger capacity gons, especially when demand retightens.

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Increased penalty costs—Cars found to be loaded improperly are held by carriers until the shipper can arrange a remote crew to adjust the load. Costs for such adjustments can be huge, as they not only include the cost of the crew to make the load adjustment, but charges from the carrier that could include an overload or improper load penalty (CN increased this penalty Jan. 1, 2009, to $10,000 per car), switching charges if the car must be repositioned and demurrage while waiting for the load adjustment. While these charges are unrelated directly to the new rules, they have raised carriers’ awareness and could result in a higher frequency of improper loading citations.

The new rules for loading loose scrap into open-top cars has created new issues for shippers. Compliance is no longer a question or a choice. Violation of these loading rules can result in significant charges. The best time to prepare for the impact of these changes is now, before the tide turns and the market demands high production once again. This effort will position shippers for the return to strong markets that will inevitably come.

The author is president of WT&L, a transportation logistics firm based in Aurora, Ohio. He can be contacted via e-mail at dennis@wtandl.com and by phone at (330) 995-9859.